CORRELATION EminiS&P-Russel2000

Quote from beer money:

Will someone take a few seconds to explain why it is important to take in account historical volatility when calculating spread ratios. It would really help me out.
Thanks

The way I understand it.... and if I think about it intuitively, the leg with the high volatility should have a lower exposure to eliminate directional bias. i.e., ER2 (Russell 2K) has a higher volatility than ES (SP500) so a lower market exposure in ER2 vs. the ES exposure. Otherwise, you will introduce a directional bias.

BTW, I'm no expert in trading this spread, may be others here might have a better explanation.
 
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